SpiceJet will try to cut costs, raise fares, says CMD Ajay Singh

Focus on profitability instead of market share is a reason why SpiceJet has been successful in posting positive results in the last 14 quarters. Its CMD Ajay Singh, in an interview with Swati Khandelwal of Zee Business, talked about the airline's plans in the face of the current business environment, their strategy to de-risk, among other things.

You have received the first delivery of Boeing 737 Max. What are the future plans for these planes?

It is a new technology for Boeing. We have ordered 205 planes. The aircraft is 14% more fuel efficient than the previous planes; it is the need of the hour, at least when fuel prices are high. It is a greener aircraft. Its noise footprint is 40% less than other planes and its nitrogen dioxide emissions are 35-40% lesser. It can fly 20% more than the other planes. This will help us in adding a few more international destinations; we will decide on them after a market study is completed. The new destinations will be announced soon. Besides, we have a product named Max, co-incidentally, its name is also Max. It is a premium economy product, with 36 seats with extra leg-room of 5-6 inches. It will also have a cushion and hot foods will be served during the flight. This is going to be the first plane in India that will be offering broadband internet to its consumers. It is fitted with every equipment and we are waiting for the policy, which is likely to be approved by November or December 2018.

What is the schedule of delivery for other planes? Also, how will you fund these orders?

We have ordered 205 planes and they will be delivered in the next four to five years. Ten more planes will be delivered by December. We have already funded all the planes that will be delivered to us by 2020.

You talked about expansion and entering new sectors. Is it viable given the current situation?

There is a demand in the market and Indian passengers are keen to fly. The existing conditions are not too favourable as fuel prices are too high, there is a depreciation in rupee and 70% of our cost is dollar-denominated.

The existing situations are impacting the airline companies. But the arrival of new planes will help us in reducing our costs as they are 14% more fuel efficient, engineering costs on them will help us save 25-30% expenses. In addition, we will try to reduce our costs and increase the fares in accordance with the costs. In addition, we will ask the government to go for the taxation system that is similar to the system that is practised in big countries.

What is stopping the government from bringing aviation turbine fuel (ATF) under the goods and services tax (GST)?

See, there are two different aspects. The first one is related to the input cost that has gone up and the existing aviation fares in India are not at par with the fares of other countries. For instance, one can fly for two hours by paying a sum of $50 in India; however, a person will have to pay a minimum of $150 for a flight of two hours (abroad). The second is that the government has its own limitations but I feel that it is the need of the hour to bring ATF under GST. In fact, the Ministry of Civil Aviation has submitted a proposal that suggests that the government will not have any revenue loss by bringing AFT under GST. Under the proposal, we have just asked them to bring transparency in the taxation system so that we can pass on the same, without causing any revenue loss to the government. It will act as a structural reform in the aviation sector as under the existing system, our revenues are not supported by the expenses that are made by us. Our cost is the highest in the world while revenues are the lowest one.

If the situation does not change, do you think it will be easy to survive in this business?

Strong airlines, which can reduce their cost and increase their fares, will be able to survive under prevalent conditions and the rest will have to go out of business. But it is a time when we all should come together to have a look at the industry. Secondly, the kind of growth the sector has witnessed in past four years, the UDAN (Ude Desh ka Aam Naagrik) scheme and the existing environment in the aviation ministry is an achievement of the incumbent Modi government and it must not try to wash them all. The excise duty on ATF was hiked to 14% from 8% when there was a decline in crude prices. We have requested the government to bring it back to 8%, under existing situations, where the oil prices are high. But it is something that will be decided by the government. Similarly, there were several states that hiked the VAT on ATF when the crude prices were on a decline. For instance, VAT on ATF was hiked to 25% from 20% in Delhi. However, there are a few states that have been reducing VAT on ATF and are coming up with policies that will help aviation companies to look towards them. I feel this reduction of VAT on AFT will help airlines to increase flight numbers in those states. For instance, the government of Uttar Pradesh reduced VAT to 0% on all new routes that are or will originate in the state. Similarly, Telangana government charges 1% VAT at Hyderabad airport and West Bengal government has halved VAT on additional ATF. These efforts are helping us to compensate for our revenues. I hope other states will also join the league soon.

Is the government open to the idea of accepting some proposals that have been submitted by you?

There is a lot of sympathy for the aviation sector and we are into discussions with the government. It may take some action related to our demands and I can't disclose the same at this moment as the discussions are on. At the same time, we, the airlines, should also do something at our end, like increase fares.

Do you think the crude prices can reach the mark of $100?

When things get worse, people say that they will get worse. Similarly, at the time of improvements, they predict more improvement. For instance, when there was a decline in crude prices, then there were people who said $50 is too high and chances are there that it will come down to $40, $30 and even $20. Same goes when its prices are on a rise. We consulted top 10 investment banks while deciding on our business plans and all of them in their suggestion said that prices of crude are going to rest between $52-60, but they went wrong. So it is very difficult to guess anything.

What is your de-risking strategy?

Our first strategy is to reduce our cost. It will be met through the new planes. These planes will help us in reducing our cost by 10% or more. We will also try to increase our revenues in both segments - passenger revenues and ancillary revenues. The revenues on the passenger side will be increased by adding new destinations, especially in locations with less competition. On the ancillary front, the revenues will be increased through the seats of Spice Max, which are premium economy seats. On the cargo front, we have introduced freighter aircraft and with it, SpiceJet becomes the first Indian airline to have it. One will have to go out-of-the-box while thinking and experimenting. However, there is no compulsion that you will achieve success in all of them.

What is the market share of SpiceJet? Also, can you give some idea about the new destinations that will be added?

SpiceJet has a market share of nearly 13% but we focus on profitability instead of the market share. This is a reason that we have been successful in posting positive results in the last 14 quarters. We have launched 42 new flights in the month of October itself and have plans to add 40 more flights to our list in November. The process of adding new flights is here to continue. For instance, we are flying to Hong Kong from Delhi and have opened booking for the same and the journey will commence on November 22, 2018. In fact, it is the first low-cost Indian airline that will connect Delhi to Hong Kong directly. Similarly, we have also started several flights to Bangkok. There are several unserved destinations and we will add them with the arrival of new planes.

Do you think we can see consolidation in the sector once again?

The entire sector is in a problem at present. But those who will survive will emerge stronger in times to come. As far as the consolidation is concerned, let's see what happens in future. However, I think that both the airlines and the government should do something for the sector. The airlines can reduce their costs and increase their fares. At the same time, the governments, both central and state, should come forward to help us.

Given an opportunity, will you be interested in taking charge of Air India?

The prevalent conditions are not good, and at present, I think we should concentrate on handling and strengthening the business that we have in our hand. But definitely, will look forward to the opportunities in future.

Do you think that crude price hike and the depreciation of rupee will impact the September quarter results?

I don't want to give any guidance related to the results of this quarter. However, the sector is in a bad shape and this is the reason that none of the airlines will be able to report great results.